Motley Fool Hidden Gems Investing - Soaring Stocks and EVTOLs

Episode Date: March 6, 2024

Target and Crowdstrike are flying after earnings, and in a few years you might be able to take off in an EVTOL.  (00:21) Asit Sharma and Dylan Lewis discuss: - Target finally finding its footing, and how the company is turning to loyalty programs for more growth. - Crowdstrike’s results showing enterprise spend on cybersecurity isn’t slowing down. - Bitcoin’s spot-ETF fueled rise to all-time highs. (16:53) Motley Fool Money’s Deidre Woollard talks with analyst Sanmeet Deo about the highly speculative, highly futuristic world of EVTOLs and personal air travel. Companies discussed: TGT, CRWD, BTC, JOBY, ACHR Host: Dylan Lewis Guests: Asit Sharma, Deidre Woollard, Sanmeet Deo Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me today! Asit Sharma. Dylan, thanks for having me! We've got stories of companies soaring today on earnings and in the sky with the future of personal air travel. We're going to start with the earnings results, and we're going to start with a look at Target. Asit, an interesting quarterly report for the company. Revenue slid, comps were down, but results were ahead of expectations, and we saw a huge market reaction. Stocks up 15% after reporting. Target's been working on some nice parts of their business, Dylan. I really like that their cost of

sales has been held in check for a while, and it keeps decreasing. That way, if you get just these small bumps on the top line, the revenues increase like 1.7%. You can leverage that if you're watching your costs, the cost of product, and how you manage those costs before you get to your overhead expenses, which of course climbed a little bit. But look, profitability is up this quarter, operating income was $1.9 billion vs. $1.2 billion in the same period last year. So, investors like an earnings story. Yeah, and I think probably something helping that top line and those margins, inventory. It seems like the company has gotten a lot better with managing its inventory, hasn't had to resort to discounting quite as much.

This is something that really plagued this business about a year ago, and it seems like that's gotten back on track for them. Yes. Management has been talking about the dislocations that occurred during the pandemic. In fact, in this latest call for this quarter, they said the dislocations are still ongoing. It's not like we still aren't struggling, but matching inventory to demand, that's something that Target has gotten much better with over the last couple of years. Inventories at very similar sales levels are down versus this time last year, $13.5 billion was the inventory balance at the end of January 2023. That's down to $11.9 billion as of February 3rd, 2024.

I look at this quarter as, OK, we're back on track with the core business. We've right-sized what we need to be doing with the balance sheet. We seem to have found what we need to be doing when it comes to pricing for Target. We also got a glimpse at some of the growth initiatives and some of the next step type things that they want to re-engage with their customers on. One of the things that I wanted to draw some attention on, and get your take on here, is the membership program. They are launching Circle360. This is a paid membership program. Asit, seemingly their answer to Amazon Prime and Walmart+. It's something that's been in the works for a while, Dylan. They acquired a company

called Shipt, S-H-I-P-T, a few years ago, actually in 2017. Target has been working on optimizing same-day delivery, local deliveries over this past six years since they bought that company. At the same time, they've worked with their store formats, they've opened more stores, they have more points of presence where consumers are, and they've opened a lot more distribution centers, logistics centers. Their fulfillment capacity is way stronger than it was before the pandemic. The natural progression for them now is to try to get some of this business that Amazon and Walmart have been enjoying, both of which companies have great infrastructure themselves. I think where Target may have an edge here, at least initially,

is this price point. If you don't pay your Amazon Prime subscription a year in advance, you're shelling out $16 a month for all that convenience. While most of the inventory will be focused on Target items, for $49 for a year subscription, I think that's something many consumers would want to try. There are local marketplaces that Target promotes through its ship capabilities. This is very interesting. It's also just a progression as Target becomes more Amazon.com like, they are also now expanding their digital advertising with vendors, and they have a digital advertising revenue stream. It seems natural. I do think we'll have to see how good they are at this business, but maybe now is the right time to roll it out.

I do wonder, as we see all of the traditional retailers and retailers that have gotten into e-commerce a little bit faster, focus on these membership programs. Costco was there first. They're the OG in this space. But we've seen Amazon do it so well. We've seen Walmart do it so well. And Target now trying to focus more on it. If we're going to see consumers really focus more of their purchasing at a single retailer and have a little bit less of the average spend splitting out across multiple retailers, that would be the loyalty program for a lot of these businesses working the way they intend for them to. I think so. But the U.S. consumer is so crazily agile. In fact, Target pointed out

on their conference call, look, you might not know this, but two-thirds of business still occurs in-store. The consumer still likes to shop in-store. We seem to have a lot of capacity for having multiple subscription and loyalty programs going on at one time. We shift our preferences, we'll shop more in-store, then suddenly get on a wave of ordering things online. The customer is nimble. I think what Target has figured out is there probably isn't going to be a winner. They're not going to be a sole winner in this space. The Costcos, Amazons, Walmarts are going to be around. New entrants will come. People still love small craft businesses. But where Target wants to be is in that muscle category. They've

poured a lot of their billions in free cash flow into great ideas in subsequent years. great ideas happen to be store openings and fulfillment. They take cash that's left over after investing in physical capacity and invest it in the next years. I think that's something that's going to help them out. They'll be one of the last ones standing. If it ever does become like that, Dylan, if we ever narrow our focus and just shop from a few vendors, I think they're going to be there. While we're checking in on the consumer Asit. I think we saw a lot of the same signs that we've been seeing in Target's results. Not as much focus on some of the bigger, more expensive items in the stores. A lot of focus

on affordability with consumers. I think one initiative that really caught my eye with respect to that is Dealworthy, which is one of their new low-priced private brands, looking to bring a lot of products in under $10. As we look at a retailer like Target as a barometer for what's going on with the consumer. What are you seeing? Consumers have a lot of propensity to bite on offers like this. When you see out in the marketplace, there's a part of the store where you can go in. I think $7 is another price point they mentioned. It draws you into that place. Now, dollar stores have been doing this for a long time, but our needs go beyond that. Target, you've got price points

that may get you in the door at $7 or $10 or to order online from, but they also extend all the way up into fairly high-priced consumer electronics. That's where they've always excelled. Target environments are meant to be a mix of different brands. In fact, they've talked about this, their own brand portfolio, their private brand portfolio, they say would be Fortune 100 company with $30 billion of sales annually. That's one-third of their gross margin. They understand that you've got to have so many different price points, and they do it through a mix of their own brands, brands that the public loves, they have the partnership with Ulta Beauty, and then also bringing in what they call the celebrity brands like Disney,

and then partnering with Starbucks in-store. They really want to lure you in with those price But I think it's a good strategy. They have a little bit of an edge over the consumers who are exhausted financially and are stuck going to the dollar stores and discount stores. They're attracting some of those, but also people with a little bit more to spend who still want a bargain to come in. Alright. We also saw a great market reaction from CrowdStrike results. Shares up 20% following earnings that beat on the top and bottom lines. Plus, the company issued stronger-than-expected guidance for the upcoming quarter and full year. Asit, so much of the narrative in the enterprise space has been slowing customer spend,

maybe a little bit of a hard focus on the contracts that exist. Doesn't seem like that's affecting CrowdStrike too negatively. It's funny, we've heard so many CEOs of cybersecurity companies talk about this exhaustion in IT departments. They are pulling back their budgets, even on the last thing you'd expect, you have to protect your enterprise. But CrowdStrike isn't seeing any of that. I think this is tied into an argument they've been making for a long time, which is, there are too many products you have to buy to protect your organization. I think on their website, they say that IT folks have to juggle 42 products on average, just to protect the organization. If you all who are listening ever just want

to have some fun and amusement, listen to CEO George Kurtz diss the competition on a conference call. He doesn't hold back and he loves to talk about how complex it is to ensure that your organization will be protected from strikes and how inadequate the different types of piecemeal offerings are. From the ground up, they've always made this argument, Dylan, we designed Falcon, our security platform, as cloud native. It's one agent, it's lightweight, you turn it on, you can add modules. This is a really seductive argument for companies that are paying so many different vendors and then spending time, money, resources to try to stitch them altogether. The argument of a platform like Falcon is that you don't have all that stitching.

While other folks may price at a lower price point, our return on investment is much higher over time. You're starting to see that prove out in the numbers. A free cash flow margin of 31%, they're projecting that revenue is going to increase another billion this year from from almost $2.9 billion up to $3.9 billion in a year. All of their metrics hitting that 30%. If you're talking about annualized recurring revenue growth, I think they're really enjoying a moment just because the simplicity argument is bearing out in the marketplace. You mentioned the recurring revenue as a focus there. In the results, Burt Podbeer, their CFO reiterated the company's long-term guidance of hitting $10 billion in annual

recurring revenue by 2030. That currently hits $3.4 billion. They have a bit of a ways to go from there. But it sounds like, Asit, you're fairly confident in that mission. I am, because I think management has a pretty good roadmap to get there. What they've done is to look at the parts of the cybersecurity industry where they can add value, even if they're competing against really worthy competitors. They have an identity management system that competes against Okta. They've got an observability platform that competes against the likes of Splunk. But where they see they can offer that return, they go there, they take years to build out those products and they add them to the platform and there's an uptake by customers.

The other thing I like about it is those big round numbers really inspire a lot of confidence among employees. ServiceNow, which I talk about a lot, they've been great at doing this. We want to be a $3 billion. No, they don't even get the next number out of their mouths and they change it, they up it. We want to be a $10 billion company. That's actually a rallying cry that ServiceNow was issuing just a few years ago. But I think this inspires confidence among vendor partners, it gives employees something to work towards, it really galvanizes the sales team, and it makes the product team understand that we've got to execute on the roadmap. If we do the simple math of working backward, what is it going

to take for us to reach this number by 2030? It means we've got to add another four pieces to the platform by, I'm making this up, but you get the picture, by 2027. I think running a business that way, if you've got the product which is superior in the marketplace, yeah, why not? Go for it. CrowdStrike at all-time highs after reporting earnings. Stepping outside of stocks, Bitcoin at all-time highs. The cryptocurrency hit near $69,000 this week. Asit, this has been a strong 2024 so far for the cryptocurrency, I think in large part because of the spot ETFs that were approved back in January. I agree with you, Dylan. There was so much demand that was being built up late last year

as investors were waiting for this to happen. Just the publicity around that, I think, dribbled down into the consciousness of so many types of investors. The investor who looked at Bitcoin a few years ago and was like, I'm not going to try to custody these assets. How do I even do that? Or I don't want a Coinbase account. They keep asking me to re-verify my identity every six minutes. I think that this pent-up demand now really has an outlet. But there's another investor as well that I'm interested in, that's the institutional investor, who's looking at a period of prolonged high interest rates and not a lot of great options to generate alpha that is returned on a risk-adjusted basis outside of U.S. stocks. Again, this happens.

have long periods where the U.S. stock market is the only game in town for a lot of institutions that have billions that they have to invest. I think there's some of that money flowing in, too. It's a non-correlative asset, so it doesn't move in tandem with the market. It's even proven to be non-correlative to risk assets like gold, which was an argument I heard at the early days, like, oh, it's going to track gold. You were saying something that was very interesting before we started taping, Dylan, that outside of the store of value argument, there is a financial argument. This is a financial instrument. Yeah. I don't have a horse in the race when it comes to crypto. I don't own any

cryptocurrencies. But I think it's instructive to look at this and the way that markets work and financial products work. We have long wondered what exactly the utility might be for crypto. With spot ETFs opening up, we are seeing a source of demand and another use case for these. Look no further than the fund inflows and the money. You mentioned that there's probably some institutional investors there. Over $50 billion have gone into the spot ETF funds since January. That's not all retail money. That's immediately creating demand and purchase for something that's going to drive up the value. I think regardless of whether you see the utility in this, it's useful to look at it and just understand the

way that expanding access to something drives demand long-term. Yeah, I think that's spot-on. Not to make a pun on spot ETFs, but there you go. That's too good. Yeah, the utility is the ability to diversify or to invest or take a little bit of risk in a low cost manner, which is what ETFs are designed to do. All right. Awesome. Thanks for joining me today. Always fun, Dylan. Thanks so much. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region.

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Sign up for exclusive access today, rippling.ai slash fool. Coming up, our travel theme week continues with a look at the not-so-distant future of flying jets and mobiles. Motley Fool Money's Deidre Woollard talks with analyst Samit Deo about the highly speculative, highly futuristic world of e-tolls and personal air travel. when we talk flying cars we're not really talking flying cars we're talking about eve tolls what is it eve tolls electric vertical takeoff and landing so it usually means it's a small vehicle it's kind of like a helicopter meets a giant drone takes off like a helicopter mostly flies like a plane usually short range generally uh maybe four passengers i mean you've taking a look at some of the videos they're they're not that pretty are they uh yeah a lot

of them are not that pretty there there's so many cons they kind of look like those you know you see those concept cars some of them look like these concept vehicles i even saw a single passenger evitol that was was really really odd looking had all these propellers like multiple propellers although i will say maybe i'm biased but there is one that's being made by archer aviation which we'll talk about later um called their midnight and that one's actually pretty sleek looking well they did give it the cool name yes and the paint and it looks very uh i showed it to my wife and she said this looks very batman like like yeah now not all of them are going to look as like you know like dark and mysterious and cool and they're going to have paint and they're going to have

logos and stuff but still we're getting we're getting closer to some some nicer looking nicer looking ones it does appeal to our sort of superhero fantasies i think but i want to talk a little bit about the use cases because you know it seems sort of fantastical you know the things that we saw in science fiction were like like air freeways this is not quite where we're going uh they're pricey they're around uh five million uh i mean not they're not really for sale yet but most obvious use case seems to be the some of the way we're using helicopters which is air taxis in urban areas. But I think as they get cheaper, there might be other applications. What else could we use these for? Yeah. And the other thing, before I get to that, one thing to keep in mind is

for our listeners that this isn't something that would be something each of us obviously named the price. So, it's quite a lot. None of us have really $5 million laying around to buy one of these. But flying cars gets a little confusing because it's not something that you're going to have one, I'm going to have one, our family's going to have one, and we're all going to be flying around like the Jetsons in flying cars. These are more commercial, mass transit-type vehicles, or even Uber-like, ride-sharing or flight-sharing-type vehicles. But I can imagine it being used for cargo delivery, short haul cargo delivery, transport around the cities. um i could see it as being very useful for but yeah i think i think the sky's the limit

man there's a pun there but i think the sky's the limit for these yeah yeah i've even heard of like recreational leagues eventually happening or you know a sporting sporting events i mean i know they had but they had like drone flying leagues so you never know but before we can get to that place we got to bring in the the big guns the the federal aviation administration the FAA. They don't just call them eVTOLs. They call them advanced air mobility vehicles. Maybe a little catchier, maybe not. And it's interesting. They're trying to create rules for, of course, the flights, for who can drive them, for takeoff locations, vertiports. That's kind of a cool name. So it's kind of important to watch if you're following this industry because

it is going to be heavily regulated. But this isn't pie in the sky. I mean, the FAA believes it'll have multiple operators flying between multiple origins and destination by 2028. But 2025 seems to be the date that the companies that we're going to talk about are really looking for the initial certification. So we've seen some test flights. They're getting pretty close here. A couple of companies I've seen are looking to even go live in 2025 and beyond. Like, uh, so, you know, there's, they're, they're running test flights, they're getting

approvals from FAA, they're getting some of their, or their certifications, they're getting some of those initial stage certifications. Um, and then they're, you know, they're, they're, they're working from there. So it's, it's, they'll, they'll be up there sooner than we know. I want to talk a little bit about the companies cause you and I have both been following this space for a little while. Um, I've taken a speculative position in one, I think you've taken a speculative position and the other one that we're going to talk about. And these are pure play. They're not making the

profits. And they're interesting because they're sort of taking different approaches. So I'm going to talk first about Joby Aviation. Been public since November 2020. We put a $4 billion market cap. Their aim is to have commercial passengers next year if they get through that FAA process. One of the things I found particularly fascinating is they recently announced they've got a six-year exclusivity deal in Dubai for air taxis, which means they would be able to run them. And they're also getting some support from the Emirates on that. So really interesting there. With both of these companies, we're looking at the partnerships. And one of the reasons the stock for both Archer and Joby has kind of gone up and continues to go up is strength of partnerships.

So, with Joby, you've got very close partnership with Delta. You've got a partnership with Toyota. You've got interest from the Department of Defense. And speaking about Delta, they're planning with Delta for infrastructure at three airports, JFK, LaGuardia, and LAX. So, they're building out production, which is interesting. It's going to be a slow process. Their next milestone is to ramp up production. looking at the cash of course these companies are spending a lot of money so at the end of last year

jobe had about a billion in cash they spent 344 million during the year for next year or this year rather they're going to spend between 440 and 470 million uh part of that is just the nature of trying to ramp up ramp up construct ramp up production and this is all expensive and one of the things that's interesting is it's sort of a new thing, but they're also using existing technology. Another thing to know about Joby is major investors. I mentioned Delta. They've got about 1.6%. Intel's got about 4.5%. You've got a lot of interest from other investors like BlackRock taking a look at this company. It's gotten farther faster than I would have expected. and i bought in i think about two years ago and the company has really you know just after it

went public and the company has really grown dramatically since then yeah joey's joey's a very interesting one um as well and so the other one that i've taken you know a speculative position in as well and for listeners keep in mind you know these are pre-revenue not even pre-profits they're pre-revenue they don't they haven't sold anything yet really they do have some orders but Those can backfire. Those could not happen. They're just orders. Archer Aviation, ticker ACHR, it's about a $1.4 billion market cap company, a little smaller than Joby. They've also been public since December 2020. They came public actually as a SPAC. They have some pretty impressive investors. Their largest investor is Stellantis, which you might know as the auto

company. So you'd be wondering, well, why is an auto company taking an interest investment in them? They also have a partnership with Stellantis. And really, I'll get to that part later. But Mark Lohr, founder of diapers.com and jet.com, also was previously, I believe it was the president of e-commerce at Walmart. He owns about 9%. Stellantis owns about 13%. And then United Airlines owns about 4%. So they're a major investor and partner. So Archer has a goal of first to market, and they're looking to go live in 2025. One of the things that I found very interesting about Archer was that they, since their start, have been focused on a quick path to certification. They're really focused on producing these things and getting them certified

and up in the air. 80% of their subsystems and components are derived from certification heritage, which means these are parts and systems that have already been certified in other aircraft or certified designs in other aircrafts. So, they can assemble all these different parts that are already certified, put it together, and then the certification process becomes a little quicker. So, that's pretty cool. They're building a huge manufacturing facility in Georgia. And that, they're hoping to eventually produce 650 aircraft annually once they start getting

up and going. And they're looking at their business as really with two revenue streams, both estimated to be about 50% of their mix. One is just selling their craft, selling them to, you know, the, the major airlines, selling them to, to, to whoever else, but also aerial ride sharing. So think of like Uber for, for, for the air, for Uber, um, ride sharing, um, but, but in, in, in flight. And actually one of the executives on their team started the Uber air flight, um, ride

sharing program. And he came over and they're estimating that, you know, ride sharing for these, these, uh, or flight sharing, I should say, I don't know what they're going to call it now, but, uh, is estimated to be about $3 per seat mile. So, that's kind of in line with pricing with Uber. Very close. So, that should be very interesting to see how they ramp and work on that. As a company, they have no debt.

They have about $460 million in cash. They have an order book of 700 aircrafts worth potentially $3.5 billion. So, again, that is potential revenue. It's not stuff they've had come in. And a lot can go wrong before they actually get that money. But the interesting thing, another interesting thing is their partnership with Stellantis, who's also an investor, is Stellantis, if you don't know, is the third largest auto manufacturer. They make Jeeps and various other brands.

And they're actually using them as almost like a contract manufacturer. You think of cars, and they have the assembly line, the process to create high-quality vehicles at mass scale very efficiently. And so, by partnering with Stellantis, they're hoping to do the same for their aircraft. And it helps reduce the capital requirements that Archer will have and increase their cash flow when it comes to manufacturing aircraft. So, I thought that was very unique. I don't know if that's what other companies are doing or not, but I thought that was quite

interesting. So as we wrap up, wondering what you think about what investors should think about as they look at this industry. For me, as I mentioned, small speculative stake in Joby. Looking, you know, I've liked what I've seen so far, may consider like adding more if it meets its targets. So things I'm asking myself is, what is the total addressable market? Like, who is the customer? It's not, to me, it's not like EVs, as we talked about. It's not an individual flying car at this point. Could it be at some point? Possibly.

Is this more like the early days of helicopters where you see sort of gradual increased usage? That seems more likely to me. looking at the the market opportunity um wondering what what i need to see to to add more and also what could go wrong we haven't had a big disaster but that you know that that will happen the same way it's happened for other things so what are you looking at here the market opportunity is is you know this could be pie in the sky numbers because you know this is so so early stage But Morgan Stanley predicts that it could be $29 billion by 2030 and possibly over $1 trillion by 2040. So, that has obviously wiggle room. We don't know for sure. But regardless,

it's a huge market. If you assume that this will work, that they can get the certifications, that they can get these in the air, that it will happen, it's going to be a big market. And it definitely will have room for multiple players and multiple ways of approaching the problem. And what's exciting to me about the industry, too, is I think it is a little bit of the early days of helicopters. And they've referenced that in some of their calls of this is kind of the new age helicopter. The reason helicopters weren't successful for the same purpose was very high noise in an urban area like in New York City, San Francisco, big cities. the last thing people are going to want is all that noise flying around above you and then having

to hear it also, you know, they weren't electric. So having the all electric purpose gives it more of the cleanliness and the environmental friendliness that we're trending towards, um, getting away from the pollution from helicopters or cars or reducing that kind of congestion. So, you know, to me it's like, yeah, I mean like many of the signals is I'll be looking for certification? How's that going? Because that's going to play a huge part in if these things even get up off the ground. And one interesting thing that I was listening to a video with the CEO of Archer that he said was, the United States has an opportunity to continue to have the lead on aircraft and mobility. And it really will be up to, he said, if the one thing

he could really have to push this industry forward would be for the FAA and regulation to really be accommodating and really help drive it forward to maintain or control lead in this space. Because other countries are going to do it. They are already doing it. So, really, regulation and how the certification stuff goes is key. And then also, just safety. Like you said, I think some of these test flights have had crashes, and that's inevitable.

You're seeing even with autonomous vehicles on the road, the crashes are going to happen as they prove these out. That's why the certification is very important. And the trust in customers saying, am I going to get in one of these things and be safe and feel safe? helicopters have a little bit of a, of, of sense from people of like on safety. So trust in safety will definitely be a huge part. And that's going to just happen from as they start flying these things. Yeah, absolutely. So if the CEO of Archer calls you up tomorrow, are you taking a test flight? Ooh, that's a tough question. No. Cause you know, I'm usually a first move around a lot of products. If I were to use the Apple Vision Pro, there's not much risk to my

life. There is a much higher risk to that. So I don't want to be the first one. But if I see evidence of lots of flights being successful, then maybe I would. Would you? I would. I would. If the CEO of Joby wants to call me up and take a flight, I'm down. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening! We'll be back tomorrow.